How to use a pricing waterfall to increase ecommerce conversions

It’s not always easy to know how to price products for ecommerce. Your overheads, manufacturing costs, and supply chain costs are different from those of traditional retail. You can use these differences to your advantage when pricing. But at the same time, customers have certain psychological expectations about what pricing means for product quality. 

Price your items too low and customers might assume that the low price reflects low product quality. At the same time, customers might be wary of dropping a lot of money on a product they haven’t seen in person. So, how can you approach such a complex yet crucial subject? You could consider implementing a pricing waterfall.

A pricing waterfall can help you to devise the perfect pricing strategy for your ecommerce business. In the process, it will help you to bring in more conversions, scale your business, and improve your competitive advantage. 

All in all, using a pricing waterfall to update your ecommerce pricing strategy is a great idea. But what is waterfall pricing, and how does it work?

What is a pricing waterfall?

A pricing waterfall, also known as waterfall pricing, is a method used to identify hidden costs and revenue leakage by breaking down the costs and discounts associated with any given product. It’s also a pricing method used to encourage bulk purchasing.

Common examples of this are “3 for 2” offers: a single tin of soup might cost $4, but 3 tins of soup bought together would cost $8, bringing the total price for each tin to $2.66.

For SaaS and other subscription-based industries, waterfall pricing is useful for showing how bookings turn into revenue – something that isn’t always immediately clear from signups alone. Waterfall pricing takes everything into account, including upgrades, renewals, SaaS marketing budgets, SaaS support costs, and free trials. Ultimately, it produces a running total that clarifies ongoing profits.

Having entered all relevant costs and discounts into a pricing waterfall, businesses can identify where discounts can (and should) be applied to encourage more purchasing. In the case of bulk purchasing, a pricing waterfall will show how many units the brand should sell before discounts are applied, and how much discount they can afford to apply.

As a general rule, a pricing waterfall comprises several major elements:

• The list price: This is the selling price set for a product.
• On-invoice discount: This is a discount set by retailers to increase sales of the product. This discount is shown on the invoice (for example, the customer will get a receipt displaying the list price, the discount, and the final discounted total).
• Off-invoice discount: These are discounts that aren’t shown on the invoice but that nonetheless decrease the price of the product. For example, advertising rebates or reduced transport costs.
• COGS (Cost Of Goods Sold): The production costs associated with a product.
• Pocket margin: The amount of revenue that comes to the seller after all discounts are deducted.

What are the benefits of waterfall pricing?

Waterfall pricing brings a number of benefits for savvy ecommerce businesses, including:

• Identifying market opportunities: A pricing waterfall helps to identify areas where you can adjust your pricing strategy for maximum impact within a particular market. For example, it can clarify which products would make good loss leaders for a particular set of customers.
• Learning more about your costs: A pricing waterfall will clarify the costs and profits involved in each sale. This helps you to work out which costs and discounts can be justified, and which you should alter.
• Boosting profits: Pricing waterfalls help you to plug revenue leaks and boost your bottom line.
• Making your operation more efficient: Having clarity regarding costs and revenue streams is a great way to identify and eliminate inefficiencies at every stage of your process. 

How to use a pricing waterfall to increase ecommerce conversions

So, a pricing waterfall is both a good analysis tool and an excellent method for boosting your profits. But how can you use one to increase your ecommerce conversions?

Take a look at some ideas below.

Define which factors should influence your pricing

To reach the most attractive and effective price, you should first work out which factors should influence your pricing strategy.

In ecommerce terms, relevant factors might include:

• Production costs
• Supply chain costs
• Shipping costs
• Promotions
• Carrying costs (i.e. the cost of storing inventory)
• Marketing allowances

Having decided on the factors that most influence your pricing, you can get to work building a comprehensive price waterfall that will clearly show you where you can apply discounts for maximum customer benefit.

Build a competitive pricing strategy

Having built your pricing waterfall, it’s always tempting to go straight for the obvious discounts and cost cuts. But wait! Before you start restructuring your pricing, conduct a competitor analysis. You don’t want to build an entirely new pricing strategy only to discover that your competitors are already doing something identical – and doing it better than you.

So, investigate your major competitors. Look at how they price their products and where they bring in the most revenue. Look at their discounts and offers. Then, use what you’ve learned to do something better and more effective than what they’re doing.

For instance, examining how Amazon utilizes its dynamic pricing model to optimize sales during high-demand periods could provide valuable insights into creating a robust pricing strategy.

Remember, some types of business will have more obvious pricing waterfalls than others. For example, performing a successful SaaS competitive analysis may be harder than performing a retail competitor analysis, because SaaS competitors won’t necessarily be bringing in new, paying customers immediately. Instead, they will use strategies like offering free trials and upgrades that translate into revenue further down the line. 

So, rather than focusing on their pricing, look instead at their marketing strategies and the lead magnets they use to pull in new customers. This could reveal areas where they’re applying discounts and areas where they’re driving revenue. You can then use this knowledge to create a more attractive and competitive pricing waterfall for your own offering.

Identify beneficial discounts

Waterfall pricing can be a huge help in identifying where you can apply discounts that are attractive to customers and beneficial to your business.

For example, a pricing waterfall could show you that offering free shipping on orders under a certain price will impact your profits, but free shipping on orders over a certain amount is affordable. 

Bringing in this shipping discount will not only be attractive to customers, but it may also encourage them to increase the size of their orders. Sure, you’ll have to absorb a few extra shipping costs, but this is usually worth it for the extra revenue that increased order sizes bring in.

Use savings to boost your sales and marketing efforts

Pricing waterfalls are often used to identify areas where costs can be cut for the customer. And that’s great! You can and should use your pricing waterfalls to identify potential discounts for customers. But that’s not all you can do with the savings and financial clarity that pricing waterfalls can bring you.

Incorporating e-commerce tools can further optimize your online sales strategies, enhancing everything from customer engagement to conversion rates.

Attractive pricing strategies are a great way to bring in conversions. But they’re useless if nobody even knows that your ecommerce store exists. So, once you’ve used your pricing waterfall to plug up revenue leaks and release extra funds, pour some of that increased profit margin back into sales and marketing.

From SEO to PPC, good sales and marketing can be a real game-changer for ecommerce – not least because it’s so quick to get from an online advert to a purchasing page. No matter what you sell, investing in good sales and marketing is almost guaranteed to pay off in increased conversions and greater brand recognition.

You could even use your new pricing strategy to your advantage in your marketing. Price comparison shopping is very common for ecommerce customers, and can have a big impact on your SEO. So, make the most of this tactic and big up your exciting new discounts and offers.

Use waterfall pricing to grow your ecommerce business and bring in new customers

Pricing waterfalls are fantastic tools that help you to gain full control over your pricing strategy. They identify hidden costs and revenue leaks and show you exactly where you can afford to adjust your costs and apply discounts.

You can use this clarity to build a competitive pricing strategy and structure that will boost your conversions and grow your ecommerce business fast. Follow the tips shared in this article and you’ll be off to a great start on your journey towards building your first pricing waterfall strategy – and reaping the benefits!